ECON 102 004 Principles of Microeconomics SW Chapter

ECON 102. 004 – Principles of Microeconomics S&W, Chapter 8 Labor Markets Instructor: Mehmet S. Tosun, Ph. D. Department of Economics University of Nevada, Reno 1

Lecture Outline • • Labor supply decision Income and substitution effects Labor force participation Demand for Labor 2

The Labor Supply Decision (a) • Do workers decide on how much to work? – Many do not – However, some workers do: • • Part‑time workers Workers who work overtime Workers who moonlight Salaried workers 3

The Labor Supply Decision (b) • The method workers use to decide on the goods they buy is the same as the method they use to allocate their scarce time to leisure or labor • Buying more of good X means a consumer can afford less of good Y. • There is also a trade‑off between work and leisure. • More work means less leisure but more consumption. 4

Trade‑offs for the Labor Supply Decision • More money or more time off • A job now but give up college or go to school and be poorer for a while but earn more money later. 5

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The Real Wage (b) • When the real wage increases, the budget constraint gets steeper. – When the real wage changes, a worker may change the amount she works. – There are two effects at work: the substitution effect and the income effect. 10

Substitution and Income Effects (a) • When the real wage rises, – Leisure is more expensive (opportunity cost of leisure rises). – The worker is richer. • The substitution effect of a rise in the real wage – Leisure more expensive, so the worker “buys” less leisure and works more. • The labor supply increases. • The income effect of a rise in the real wage – The worker is richer and buys more normal goods: CDs, restaurant meals, and leisure. • Workers work less and the labor supply falls. 11

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Labor Participation (b) • For most men, the decision is not whether to work but how much. • Formerly it was presumed that women would drop out of the labor force to have children and that they would not reenter the labor force after the children were grown. • Today women's labor force participation rate is over 50%. 14

Women’s Labor Force Participation • Women’s labor force participation rate has risen dramatically over the last 40 years. • In addition there has been an increase in the demand for women's labor as discrimination has been barred by federal law and attitudes have changed. • Women's employment and wage situation can be explained partly by a shift of the labor supply curve and partly by a movement along the labor supply curve. 15

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Labor Demand • The demand for labor is a derived demand – It depends on the demand for output workers produce • Firms hire workers only if they are profitable. • The last worker hired makes just enough output so that when it is sold, it equals his or her wage. 17

The Marginal Product of Labor (a) • Marginal product of labor (MPL) – The output one additional worker produces (holding all other inputs, such as capital, constant) • The law of diminishing marginal returns – The MPL is a decreasing function • As more labor is hired, successive units are less productive because they use less capital. 18

The Marginal Product of Labor (b) • Value of the marginal product (VMP) – The revenue the additional worker earns for the firm • The VMP is the value of the additional worker's marginal product: VMP = p*MPL. • The value of the marginal product curve is the firm's demand curve for labor. – The VMP is downward sloping (like all demand curves) because of diminishing marginal returns to labor. • Firms hire labor until – VMP = wage, or – p*MPL = w 19

The Marginal Product of Labor (c) 20

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